It is unfolding very fast. Chinese firms are reconsidering their presence on American exchanges, a complete reversal of a trajectory that up until recently saw China-based firms piling into markets in the United States and elsewhere outside of China. According to estimates prepared by the American Enterprise Institute, the de-listing trend has already reduced the market capitalization of Chinese firms listed in America by half. Similar movements have taken hold in other western stock markets and even in Hong Kong. The Chinese presence will shrink farther and may even go to zero. Practically speaking, the trend may have little effect on financing, because direct investment in China from the United States is rapidly providing a substitute for the funds once raised in western markets.
This dramatic shift has its roots in data. The U.S. Securities and Exchange Commission (SEC) has demanded more disclosure – more data — than in the past, while the authorities in Beijing have become increasingly secretive about giving data to anyone, much less the American authorities. Companies caught between such impossible demands have asked for concessions from both the U.S. and Chinese authorities and, receiving none from either until very recentry, have had little choice but to de-list.
Actually, official American demands have not changed. What has changed is the zeal for enforcement at the SEC. For years, the authorities in Washington demanded full disclosure from listed Chinese companies, as it does from all listed firms, American and foreign. But when the Chinese firms showed a reluctance, the authorities took little action. In response to the inevitable frictions, the Obama White House negotiated what it referred to as a “settlement.” It consisted of the SEC looking the other way. The Trump White House took a harder line. It gave the Chinese three years to fix the problem or be forcibly de-listed.
In January this year, the Biden SEC decided to enforce the Trump position. Given Biden’s vitriol against Trump, there is considerable irony in this, but appearances to the contrary, the SEC is nonetheless moving. Under what is called the Holding Foreign Companies Accountable Act, the SEC now claims the power to unilaterally and forcibly de-list any company that the Public Company Accounting Board says it cannot audit fully.
As Washington has gotten tougher about demanding information, Beijing has become increasingly concerned about what it calls “data loss.” Chinese authorities have always shown a reluctance to share information with anyone, especially foreign regulators. Beijing was always happy to receive data from foreign investors entering the country but resisted any outflow, even to the headquarters of the foreign investors and much less to a foreign government. Such attitudes have hardened in the last couple of years under President Xi Jinping. If in the past what data Chinese companies shared with the SEC was inadequate, what Beijing now allows will fall even shorter of legal requirements.
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De-listing would be more of a problem for Chinese business were not that foreigners, especially Americans, are sending huge flows of investment funds to China. To some extent, the American investors are sending funds to China to make up for the lack of Chinese investment options on American exchanges. But whatever the reasons, the flows have grown. Little data is available for 2021, but the $1.15 trillion Americans put into Chinese stocks and bonds in 2020 dwarfed anything before. It was, in fact, more than three times the amount of just four years before, an almost 33% annual rate of expansion. To encourage this trend, Beijing has given American brokers and investment bankers more freedom than previously to own their operations in China, though at the same time the Chinese authorities have increased their observation and control of the American investment tools these firms have brought with them.
It should be apparent in this little drama that neither China nor Chinese business has lost out. A substitute investment flow has met the primary reason for listing on American stock exchanges in the first place. Neither the SEC nor the American government ever had objections to investment flows into Chinese firms. It only wanted the Chinese firms to abide by the rules that applied generally. As it is, Beijing has tried to stay the SEC’s hand by changing its rules to allow foreign regulators to look at a company’s books, but it is still not clear how matters will work out in practice. Meanwhile, if the American investors pouring their money into China do not worry over secrecy or double standards imposed by Beijing, that is their business and possibly someday, their loss.